Sa'udi Arabia - Economy

The economy is heavily dependent on oil production, which provided over
90% of export value and 75% of government revenues in 2001. The country
has the largest reserves of petroleum in the world, 24.9% of the proven
total as of the end of 2000, with its northern neighbor, Iraq, holding
second place at 10.7%, and two other Arab neighbors, the UAE and Kuwait,
third and fourth, at 9.3% and 9.2%, respectively. Rapidly increasing oil
income after the first oil shock, 1973–74, led by the
Organization of Oil Exporting Countries (OPEC) cartel, were used to
increase disposable income, defense expenditures and economic
development. OPEC was able to enforce a quadrupling of oil prices (from
$2.50/bbl to $10/bbl) largely because of King Faisal's agreement
to deploy the oil weapon in conjunction with the Yom Kippur War. Per
capita income in current dollars peaked at $15,700 in 1980 after the
second oil shock, 1978–79 in conduction with the Iranian Islamic
revolution, sent oil prices to all-time highs, peaking at just over
$40/bbl. in September 1980 at the start of the Iraq-Iran war. From
there, population growth (about 350% 1973 to 2003, from 6.76 million to
24.3 million, including an estimated 5 million non-nationals), a
decreasing OPEC share of world oil production (from over 50% in 1973 to
less than 30% in 1985 to about 40% in 2003), oil conservation efforts
among consumers, and limited success in diversifying the economy have
combined to reduce per capita income more than 40% to $6,837 by 2001
(equivalent to $10,600 in purchasing power parity terms according to CIA
estimates). The contribution of the oil sector (crude oil and refined
products) to the overall GDP, nevertheless, has substantially decreased,
from 70% in 1980 to an estimated 40% to 45% during the period 1999 to
2001.

As an oil producer, Sa'udi Arabia's economy has a rentier
structure, profiting from oligopolistic ownership of a factor of
production. Marginal production costs for a barrel of oil in
Sa'udi Arabia are about $1.50, which, since 1973, it has
generally been able to sell for between $10/bbl. and $40/bbl. largely
because of cooperation within OPEC, an open producers' cartel.
After the collapse of world oil prices in 1986, when benchmark
Sa'udi light oil, at $28/bbl. in 1985, bottomed out at $8/bbl.
(in real terms, lower than 1973 prices), the economy has been more
subject to more normal operations of supply and demand. Maintenance of
OPEC target prices rests heavily on Sa'udi restraint, often below
its official quotas. Sa'udi restraint reduces its oil revenues as
the same time that the high price encourages non-OPEC production and
cheating by poorer OPEC members, which, in turn, brings down the world
price, which also reduces Sa'udi oil revenues.

The government has always made economic diversification a top priority,
seeking to develop industries using petroleum, such as petrochemicals,
as well as to finance industrialization. By 1989 the massive Jubail and
Yanbu'al-Bahr industrial complexes, combining petrochemicals and
steel production had been largely completed. Diversification efforts,
however, are made within the context of a number of fundamental
restraints, the most pervasive being the rentier structure itself, which
blunts incentives to acquire competitive skills. in favor of efforts to
maintain monopolitistic advantages. Even in the capital-intensive oil
industry, the Saudis have relied heavily on foreign workers who make up
about 20% of the population. The Kingdom's intolerance of
democratic processes, labor unions, women's participation in the
work place, and foreign influences are just some of the more obvious
impediments to development beyond a rentier-based economy.

There are, however, mounting pressures for economic reform, including
falling per capita income, attendant social frustrations, the emergence
of government deficits and a sizeable, though still manageable, external
debt. In 1998 the government, led by Crown Prince Abdullah, embarked on
a privatization strategy as a means of restoring per capita growth. In
April 1998, the Sa'udi Telecommunications Company (STC) and the
Sa'udi Electricity Company (SEC) took initial steps in
privatizing telecommunications and electric power services. In September
1998 Prince Abdullah held meetings in Washington, D.C. with several
leading American oil company representatives, beginning what has been
called the Crown Prince's Oil Initiative, which is essentially a
plan to bring private companies in to develop Sa'udi natural gas
resources the way they had developed the country's oil resources.

Real growth of the GDP averaged about 2.6% between 1988 and 1998. The
economy shrank by 11% in 1998 due to low world oil prices, but posted a
1% gain in 1999. Nominal GDP growth was 21.3% in 2000 and a negative
10.7% in 2001, reflecting, respectively, a sharp rise and a sharp fall
in oil prices. However, the CIA estimates real growth for 2001 at 1.6%.
The CIA also estimates that inflation in 2001 was 1.7%.

In 1999, the Crown Prince revitalized efforts to secure Sa'udi
Arabia's acceptance in the WTO, although with no apparent
intention of eliminating some of the more obvious violations of trade
organization's principles, such as a strict enforcement of
boycotts against Israel. In 2003, the Sa'udis hired a Texas law
firm to lobby on its behalf for accession to the WTO.

The economy remains dominated by large state-owned monopolies. For 2001,
the CIA estimated that the private sector accounted for about 25% of
GDP, a decrease from an estimate of 35% in 1999. The government is
considering privatizing the national airline, petrochemical industries,
the telecommunication sector, and electricity companies to foster
diversification, but no firm plans have emerged. The government
encourages growth in agriculture as a means to reduce Sa'udi
Arabia's net reliance on food imports, but dramatic reductions in
farm subsidies resulted in a continuing decline in agricultural output.

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